High-Yield Savings Accounts: The Ultimate Guide
High-yield savings accounts can offer higher interest rates than traditional counterparts. Learn everything you need to know about them in this guide.
You have a variety of options when it comes to saving your money: investing it, keeping it in a checking account, or opting into a high-yield savings vehicle.
High-yield savings accounts typically offer higher interest rates for your money than traditional savings accounts and can be best suited for funds you need to access in the short term.
You have a lot of choices when it comes to how you save your money. Depending on your financial goals, you may want to invest, keep your money in a checking account, or move it into a savings account.
Each choice comes with pros and cons. When you invest, you may be able to get better returns, but it’s not as liquid (meaning it’s harder to quickly access your money). There may be penalties for withdrawing before a specified time, limits on how much you can withdraw, and other restrictions.
Investing can also present more risk, especially with short term goals. A checking account allows quick access to your money, but funds in checking accounts generally don’t accrue interest (and when they do, it’s often not much).
For short-term savings goals like establishing an emergency fund, preparing for an upcoming project, or planning your next big trip, a savings account can be a smart approach. It gives you a separate account to save toward your goal—which you hopefully won’t be as tempted to use for regular purchases, like you would with a checking account. It also accrues interest over time, so your account will grow beyond what you deposit.
Unfortunately, traditional savings accounts tend to have very low interest rates. According to the Federal Deposit Insurance Corporation (FDIC), the national average interest rate for a savings account is 0.09 percent.
That means if you deposit $10,000 into an average savings account right now and don’t touch it, a year later it will only be $10,009.
That’s not nothing, but depending on the fees associated with your account and inflation, your money could actually lose value over time if the interest rate is too low.
Thankfully, there’s another option. If you want to accrue more interest while still having convenient access to your money, you’ll want to look into a high-yield savings account.
In this guide, we’ll explore:
- What makes a high-yield savings account different from traditional savings accounts.
- How to spot some key features to look out for.
- When you should use one.
For starters, let’s talk about what these accounts actually are. Please note that Betterment is not a bank and this article is intended to be purely educational.
What is a high-yield savings account?
A high-yield savings account is exactly what it sounds like: a savings account that typically gives you a higher annual percentage yield (APY) than traditional savings accounts.
It’s not an investment, so there’s minimal risk: your earnings are guaranteed based on the APY offered by the institution. And these accounts often have no fees (or else, minimal fees) to start or maintain your account. You simply make deposits and watch your savings grow over time.
Additionally, high-yield savings accounts backed by one or multiple banks are federally insured by the FDIC for up to $250,000 per bank, if that bank is a member of the FDIC. Through a credit union, they may be insured for the same amount by the National Credit Union Association (NCUA). Check with your local credit union to ensure they are part of the 98% regulated by NCUA.
How do they compare with other account types?
Since you have a lot of options when saving for financial goals, it’s helpful to consider which account type makes the most sense for your situation.
Here’s a quick look at the typical APY for a one year certificate of deposit (CD), a traditional savings account, a checking account, and a high-yield savings account, assuming you deposit $5,000:
|Account type||Typical APY*||Balance after 12 months|
|Traditional savings account||0.10%||$5,005.00|
|High-yield savings account||2.336%||$5,116.80|
|One year CD||2.55%||$5,127.50|
Data source: *Typical APY was determined using the top five accounts in each category in the U.S., as determined by NerdWallet in July 2019.
In many cases, you can find a 12-month CD that will accrue more interest in one year than a high-yield savings account. But one of the key advantages of a high-yield savings account is also one of the disadvantages of a CD: liquidity.
Like a traditional savings account or a checking account, with a high-yield savings account you can use your money when you need it—in many cases without penalties of any kind. And unlike a CD, you don’t need to wait a specified period for your funds to “mature” (this is when the money is “due” back to you).
So you could save for three months. Or 14. It doesn’t matter. If you reach your savings goal ahead of schedule, you can start the next step ahead of schedule, too, instead of waiting for your funds to become available again.
A CD may be a better option if you plan on:
- Saving for multiple years.
- Not touching your funds for the entire duration.
But if you may need to access your money quickly or you only plan on saving for a short time, a high-yield savings account will give you similar gains with far more flexibility.
And while traditional savings and checking accounts are convenient and accessible, their interest rates are typically very low (and in the case of the average checking account, virtually nonexistent). Your money is essentially just sitting there, waiting to be used. Your account will only see significant growth when you make deposits. And the forces of inflation may actually decrease the value of your money.
A high-yield savings account can give you the flexibility you expect from your traditional savings or checking account, but keeps your money working toward your goal whether you make additional deposits or not.
Now let’s look at what kinds of goals a high-yield savings account can be well suited for.
When To Use A High-Yield Savings Account
A high-yield savings account is often ideal for short-term financial goals and funds you may need to access quickly. This could include goals like:
- Establishing an emergency fund
- Saving for a wedding
- Planning a vacation
- Getting ready for a down payment on a house
- Preparing for college next year, or in a few months
- Making home renovations
- Buying a car
- Anticipating taxes (especially if you’re self-employed)
Really, any purchase you plan on making in the next few months or within a couple of years could be a good fit for a high-yield savings account.
You could use a high-yield savings account for longer term goals like an education fund for your children or retirement planning, but when you won’t need to access your funds until years from now, it may make more sense to look into opening an investment account (such as a taxable brokerage account or IRA).
Investing generally carries greater risk than a high-yield savings account, but typical market returns may be greater than the interest accrued from a savings account over long periods of time.
But for your short-term goals and funds you need quick access to, a high-yield savings account might be the smart choice.
You wouldn’t want, for example, to have your emergency fund tied up in a CD where it’s not as available to you. You never know when an emergency is going to happen, so you need your emergency fund on hand at all times.
If you decide a high-yield savings account is the right choice for your goal, there are still some big decisions to make. There are countless banks and credit unions—both online and physical—that offer high-yield savings accounts, and they aren’t all created equal.
Here’s how to spot the good ones.
How To Compare High-Yield Savings Accounts
Before you choose a high-yield savings account, there are a number of factors you’ll want to compare. While the APY is the most obvious and appealing feature, there are other differences between accounts which can affect the following:
- How fast you’ll reach your goal.
- How much your balance will actually grow.
- How available your funds really are.
Here’s what you’ll want to take a look at when evaluating your options.
Many high-yield savings accounts require a minimum deposit to open your account. Depending on the amount you have to get started, you may need to pay as much attention to the minimum deposit as the APY when you select an account.
Some accounts have a minimum balance you need to maintain in order to receive the advertised APY. If you fall below that amount, you may default to a significantly lower APY, in which case you might be better off choosing another bank with a lower rate but no minimum balance.
This is a bigger factor if you plan on making withdrawals frequently, as you’re more likely to fall below the minimum.
Because of the Federal Reserve’s “Regulation D,” there are transfer and withdrawal limits you should be aware of before signing up for a high-yield savings account. Keep in mind that banks may impose further limits and have their own guidelines and restrictions regarding them—and the penalties you may incur if you go beyond them.
If you plan on withdrawing from this account frequently or transferring funds to your checking account, you’ll want to pay attention to these limits.
Many banks charge fees to open and/or maintain an account. They may charge these fees annually, monthly, or quarterly, and in some cases they may cancel out or even exceed the gains you’d see through interest. Some banks may build the fees into your APY so that you’ll still see the advertised gains, and others add these fees after, which reduces your actual yield.
Additional Account Requirements
Sometimes banks won’t allow you to just open a high-yield savings account. They may require you to also open a checking account (which may come with fees and a minimum balance of its own). So even if their high-yield savings account has the best APY, you’ll have to decide if it’s worth the extra baggage that comes with it.
In addition to the number of transactions you’re allowed to make, you’ll want to explore the ways you’re allowed to make withdrawals. Can you make transactions online, or do you have to physically go to the bank or credit union? Is there a mobile app you can use? An ATM?
You want convenient access to your money, so be sure to consider that when you’re deciding where you save.
Similarly, some banks and credit unions make it more convenient to make deposits. Ideally, you want a bank that lets you deposit your paycheck directly into your account, or at least lets you set up automatic deposits that pull from the account your check is currently going toward. This will help ensure that you actually put funds in this account each month by reducing the temptation to simply deposit whatever is left over each month (which will almost always be less than you want).
The easier it is to make deposits, the more likely you are to stick to your goals.
Your annual percentage yield (APY) represents how much you can expect your balance to grow each year. But within that year, your interest compounds at different frequencies depending on the account you choose.
If your account compounds monthly, that means your balance will accrue a little bit of interest every month. If it compounds daily, you accrue interest daily. It could also accrue quarterly, semiannually, or even annually.
That means some accounts accrue more interest on their interest than others, even if they have the same APY. If two accounts have 2% APY, but one compounds annually and the other compounds daily, the account that compounds daily will actually grow more than 2% over a 12 month period.
You’ll accumulate 2% interest on the original balance, but since the interest compounds every day, you’ll be gaining interest on your interest, too. But the account that compounds annually will only accrue interest on your interest the following year, when the interest has been in your account for 12 months.
So depending on how long you plan on saving and how frequently you want to make deposits and withdrawals, an account that compounds daily may be a better option than one that compounds annually, semiannually, or quarterly, even if it has a slightly lower APY.
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